Treasurys pare gains ahead of critical jobs report

ReginaHing

NEW YORK (MarketWatch) — U.S. treasury prices pared gains on Thursday, as investors who were disappointed by European Central Bank chief Mario Draghi’s noncommittal stance turned their attention back home to await July’s labor report.

Most analysts see the report, due for release Friday morning, as the key metric the Federal Reserve will use to decide whether the economy needs another boost. Read the July jobs data preview.

“If there’s substantial deterioration in the labor market, then I think the Fed is obligated to act, and they will use the quantitative easing channel,” said Chris Sullivan, chief investment officer at United Nations Federal Credit Union.

Sullivan said he expects the central bank to take at least two months’ worth of labor data into consideration before acting. After its meeting Wednesday, the Fed said it “will provide additional accommodation as needed” but stopped short of announcing concrete plans for more stimulus.

Weaker euro is silver lining for Europe's exports

(5:38)

Europe's deepening economic crisis is taking a big bite out of corporate earnings, but it is providing one silver lining to the Continent's major exporters: a weaker and more competitive euro.

Thirty-year yields
TMUBMUSD30Y, +0.00%
fell 5 basis points to 2.55%, after falling as much as 8 basis points following the ECB press conference.

At the press briefing, Draghi said the central bank may undertake additional “outright open market operations”, but refrained from making any new policy announcements outside of keeping the benchmark interest rate at 0.75%. Earlier this week, analysts had warned that investors looking for bolder measures from the ECB were likely to be disappointed. Read Draghi: ECB ready, but governments must act.

“The initial reaction was that he was saying all the right things, but ultimately what the market realized is, saying all the right things and doing all the rights is vastly different,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets.

“They realized it’s not going to be a very straightforward process to enact any of these policies.”

“Is anyone surprised that the ECB continues to be the ‘Lucy’ in the middle of the debt crisis and the market is effectively assuming the role of ‘Charlie Brown’, willing to keep taking a shot at kicking the football only to have it pulled away at the last minute?,” Kevin Giddis, senior managing director at Raymond James/Morgan Keegan, said in a note. “How many times can we fall for this?”

On Draghi’s remark that governments must “stand ready to activate the European Financial Stability Fund in bond markets”, Porcelli said the central bank chief was making a plea to countries who have yet to formally seek help from the region’s rescue fund. “He’s looking for buy-in from the governments, it’s that simple.”

As Draghi was speaking, the U.S. Commerce Department reported that jobless claims rose by 8,000 last week, to a seasonally adjusted 365,000. The reading was slightly lower than the 370,000 economists had predicted, but the range suggests little growth. Read more on jobless claims.

Adding to negative sentiment all around was the report that factory orders for June fell 0.5%, far short of the 0.3% increase economists polled by MarketWatch had projected.

Yields rose last week after Draghi said he is prepared to do “whatever it takes” to keep the union together, raising broad expectations that stronger steps will soon be taken to address the sovereign debt crisis.

But Porcelli noted that the ECB chief seems to be backing away from the strong words he used earlier.

“I’m really surprised at the amount of attention my remarks last week received in the press,” Draghi said at Thursday’s news conference.

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